When is a tax not a tax?

 

When is a tax not a tax? When neither party wants it to be, apparently.

Tuesday night’s budget compromise was met with little excitement on Wall Street, but broad acceptance on Capitol Hill. Despite outcries from Tea Party Republicans, the agreement will likely be passed by the House on Thursday and by the Senate early next week. The plan includes an increase in government revenues, but it (cleverly?) skirts the political quagmire of taxation by raising fees that are charged to air travelers through the Transportation Security Act (TSA). The TSA also collects fees from air carriers, but these will not be changed; the fee for passengers will be doubled to an average of $11.20 per round trip.

If there is any justification for such a move (other than pure necessity) it is that even after the increase, the fees will still pay for only about 40% of the government’s spending on aviation security. Nevertheless, this is a tax increase at the end of the day, and one which will increase the cost of air travel relative to other means of transportation. Predictably, the airline industry is crying foul.

Nicholas E. Calio, president and CEO of the trade organization Airlines for America, said in a statement, “Doubling the TSA passenger security tax would cost passengers more than $730 million annually, placing a huge additional tax on the traveling public, with no direct benefit to those who pay it.” Calio further attacked the plan in an opinion piece in The Washington Examiner, scoffing at the idea that the fees were needed for heightened security.

U.S. Travel Association President and CEO Roger Dow also raised doubts about whether the fees were truly meant to improve air travel, saying in a statement, “It is concerning that the move appears primarily aimed at getting a big chunk of Transportation Security Administration funding off the strapped federal ledger.”

At present, the market does not feel that the new fees will overburden the industry; shares of American Airlines (AAL) and Delta Airlines (DAL) have both fallen by about one percentage point since the plan was announced, which is roughly in parity with the broader market. Still, if the government begins to rely increasingly on fees because it needs the money but can’t muster the political will to change tax rates, it represents a troubling new trend, and one worth keeping an eye on.

Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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